In the watershed decision of Morrison et al. v. National
Australia BankLtd., the United States Supreme Court
has held that private causes of action under Section 10(b) of the
Securities Exchange Act of 1934 (Exchange Act)1 may not
be based on the purchase or sale of securities on foreign exchanges
or on securities transactions otherwise occurring outside the
United States.2

In so ruling on June 24, 2010, the Court reversed decades of
precedent in federal appellate courts, which had developed various
tests to determine when the extraterritorial application of Section
10(b) and its related Rule 10b-5 was appropriate.3
Instead of selecting among these tests or developing a different
test, the Supreme Court found Congress did not intend Section 10(b)
to apply extraterritorially. In the process, the Supreme Court made
clear that the United States would not become a global
forum for securities fraud cases imported from overseas securities
exchanges even if the case involved US actors or US-based
activity.

Section 10(b) of the Exchange Act authorizes the US Securities
and Exchange Commission to promulgate rules forbidding "any
manipulative or deceptive device or contrivance" used in
connection with the purchase or sale of any security
"registered on a national securities exchange or any security
not so registered." Section 10(b) has long been understood to
support a private cause of action against persons or entities
violating SEC Rule 10b-5, which generally prohibits the use of
deceptive acts or schemes to buy or sell securities.

At issue in Morrison was what has become known as a
"foreign-cubed" or "f-cubed"
set of facts, involving non-US investors who purchased shares of a
non-US company on exchanges outside of the United States and who
then bring suit in US courts. In Morrison, the plaintiffs
resided outside of the US and purchased shares of the defendant
National Australia Bank (NAB), Australia's largest bank, on the
Australia Securities Exchange, the London Stock Exchange, the Tokyo
Stock Exchange and the New Zealand stock exchange. While NAB has
American Depositary Receipts (ADR) trading on the New York Stock
Exchange, US ADR holders were not part of the case before the
Supreme Court.

In 1998, NAB acquired a Florida-based mortgage service provider,
Homeside Lending, Inc. In 2001, NAB disclosed that the interest
assumptions in the valuation model used by Homeside to calculate
the value of its mortgage servicing rights were incorrect,
resulting in an overstatement in the value of those rights. NAB
later announced that it would incur a $450 million write-down due
to the recalculation of the value of those rights. NAB's common
shares and its ADRs fell more than 5 percent after this news was
announced. Shortly thereafter, NAB announced yet another
write-down, this time for $1.75 billion and its shares fell by more
11.5 percent.

NAB's security holders sued in the US. Three of the four
plaintiffs purchased their shares on exchanges outside the United
States and sought to represent a class of non-American purchasers
of NAB common shares. The fourth plaintiff purchased ADRs and
sought to represent a class of American purchasers. The defendants
moved to dismiss the claims of the non-US plaintiffs for lack of
jurisdiction and those of the domestic plaintiff for failure to
allege he suffered damages springing from the fraud. The district
court dismissed all of the claims, and the non-US plaintiffs
appealed. On the appeal before the Court of Appeals for the Second
Circuit and the Supreme Court, only the foreign plaintiffs
remained. None of them had purchased the defendant's securities
on a US exchange or over-the-counter-market.

The Second Circuit, following its earlier decisions, employed a
"conduct and effects" test to determine whether Section
10(b) should provide the foreign plaintiffs with a right of action.
The conduct and effects test required the court to analyze
"(1) whether the wrongful conduct occurred in the United
States, and (2) whether the wrongful conduct had a substantial
effect in the United States or upon United States
citizens."4 Using this test, the Second Circuit
held that any acts performed in the United States by NAB or
Homeside did not "compris[e] the heart of the alleged
fraud," and thus affirmed the dismissal of the plaintiffs'
claims.5 Subsequently, the Supreme Court accepted the
plaintiffs' appeal.

Writing for the majority, Justice Antonin Scalia affirmed the
dismissal of the plaintiffs' claims, but rejected the Second
Circuit's conduct and effects test. Instead, the Court
established a bright-line rule against the extraterritorial
application of Section 10(b), holding that a cause of
action exists only for securities listed on US exchanges or
domestic transactions in other securities, to which Section 10(b)
applies.6 Relying on the "longstanding principle of
American law" that Congress does not intend a statute to apply
extraterritorially absent an indication otherwise, the Supreme
Court found nothing on the face of Section 10(b) or the Exchange
Act to suggest that Congress meant Section 10(b) to apply
extraterritorially.7

The Supreme Court also rejected the plaintiffs' arguments
that Section 10(b) should apply because some of the allegedly
deceptive conduct occurred in the United States.8 The
plaintiffs alleged that the deceptive calculations regarding
mortgage servicing rights were performed in Florida, where Homeside
was located, and that individual defendants made misleading
statements from the United States.9 The Supreme Court
dismissed these arguments, finding that the "focus" of
the Exchange Act was not on the place of the deceptive conduct, but
rather on whether the violative conduct occurred in connection with
either the purchase or sale of a security listed on a US exchange
or in the United States.10That the allegedly
fraudulent conduct had some connection to the United States was
insufficient; rather, the transaction in the underlying securities
must have occurred in the United States.

Concurring in part and in the judgment, Justice Stephen Breyer
agreed that the securities at issue in Morrison were not
purchased on any "national securities exchange," nor did
they fall into the category of "any security not so
registered."11 Justice Breyer also noted that other
state and federal laws may give rise to a cause of action for the
fraudulent conduct alleged by the plaintiffs.12 Justice
Breyer concluded by noting, however, that the case did not require
the Court to "consider other circumstances" beyond these
narrow issues.

Concurring only in the judgment, Justices John Paul Stevens and
Ruth Bader Ginsburg took issue with the majority's purely
statutory analysis of the case and with its dismissal of "the
long pedigree of, and the persuasive account of congressional
intent embodied in, the Second Circuit's" conduct and
effects test.13 Justices Stevens and Ginsburg viewed the
issue presented as "how much, and what kinds of, domestic
contacts are sufficient to trigger application of
§10(b)."14 Instead of casting aside decades of
judicial precedent, Justices Stevens and Ginsburg would have made
the Second Circuit's conduct and effects test the standard for
determining extraterritorial application of Section
10(b).15 Regardless, they concurred in the
majority's judgment because they found this case presented
insufficient links to the US and instead had "Australia
written all over it."16

Morrison marks a significant and welcome departure from
past, uncertain applications of Section 10(b) in foreign-cubed
cases. Significantly, however, the decision in
Morrison addresses only private causes of action under
Section 10(b) of the Exchange Act. As Justices Stevens and
Ginsburg noted in their concurring opinion, "[t]he Court's
opinion does not . . . foreclose the [SEC] from bringing
enforcement actions in additional circumstances, as no issue
concerning the [SEC's] authority is presented by this
case."17 Thus, the Court left for another day the
issue of whether the SEC may bring an enforcement proceeding in a
foreign-cubed situation such as Morrison.

Additionally, pending legislation in the US Congress may
pose a threat to the continued viability of the holding in
Morrison. The Investor Protection and Securities Reform
Act of 2010, currently before the US House Committee on Financial
Services, would amend the US securities laws to give US courts
jurisdiction over violations of the Securities Act of
1933,18 the Investment Advisers Act of
1940,19 and the Exchange Act where there is:

(1) conduct within the United States that constitutes
significant steps in furtherance of the violation, even if the
securities transaction occurs outside the United States and
involves only foreign investors; or

(2) conduct occurring outside the United States that has a
foreseeable substantial effect with in the United
States.20

In addition, the pending legislation would direct the SEC,
within 18 months after enactment, to report (after comment and
study) on the extent to which private rights of action under the
Exchange Act should be extended to cover the conduct described
above.21

Footnotes

1.15 U.S.C. § 78(j)(b).

2.No. 08-1991, 2010 WL 2518523, at *3-4 (U.S. June 24,
2010).

3.See id. at 5-8 (discussing tests developed by
various circuit courts of appeal).

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